Advisers for school district borrowing now face a finance exam. Some experts say it's not hard enough.

After governments across the country, including Chicago Public Schools, suffered devastating losses on risky bond deals during the financial crisis, Congress passed a 2010 measure setting first-ever standards for the advisers who guide government borrowers.

But some worry a planned certification test — which municipal advisers will likely have to pass by the end of 2016 — will not do enough to weed out unqualified practitioners. One expert said he believes the exam will not sufficiently test advisers' ability to evaluate interest-rate swaps, the burdensome derivative deals that helped spur Congress to set standards in the first place.

The test material "is not demanding enough," said Andrew Kalotay, member of a group of municipal advisers convened by federal regulators to help outline the content of the exam. "If you look at the Chicago transaction, I don't think people (who mastered the test material) would know anymore how to handle that than they do now."

Municipal securities regulators defend the proposed exam, saying that it is intended to test "basic competency" and pointing out that additional rules are expected to prohibit municipal advisers from taking on work that they are not qualified to do. Tennessee-based municipal adviser Larry Kidwell, another member of the working group, called the plan to test advisers "a good first step."

The working group has met several times a year since 2010 to develop the outline as well as sample test questions. The regulatory body managing the process is the Municipal Securities Rulemaking Board, an organization governed by representatives from industry and the public that was created in 1975 by federal law to write rules governing municipal securities.

Board Executive Director Lynnette Kelly called the test an important tool for protecting public funds: "Ensuring that individuals who provide advice to state and local governments about municipal securities transactions meet minimum standards for qualification is essential in a capital market that involves public finances and taxpayers' resources."

The working group is still finalizing the outline, and both the rule-making board and the U.S. Securities and Exchange Commission must still review and approve it — something that is expected to happen early in 2015.

A statement by the rule-making board described the working group's outline as "a blueprint for the exam."

The certification is one of several standards municipal advisers will have to live by in the wake of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The act also requires advisers to prioritize their clients' interests above their own, the first time that duty was set in federal law.

Before 2010, federal law set no requirements for municipal advisers, even as the field grew rapidly.

In the 2000s, as banks pitched complex borrowing instruments to governmental bodies, those entities increasingly leaned on municipal advisers to guide them through the deals.

Advisers worked on 70 percent of municipal bond deals in 2008, up from half in 2002, according to findings cited in the Federal Register. With no certification or even registration required, the barrier to entering the profession was low, and the pay — often coming out of the proceeds of multimillion-dollar bond deals — could be lucrative.

The advice these consultants doled out around the country was sometimes problematic, the Federal Register reported. Some advisers failed to place their clients' needs ahead of their own interests while others lacked "adequate training or qualifications," according to the findings.

In Chicago, from 2003 to 2007, public school officials and their financial advisers guided CPS into $1 billion of auction-rate debt paired with interest-rate swaps. A Tribune analysis reported last month found the cash-strapped school system now stands to pay about $100 million more than traditional fixed-rate debt would have cost thanks to those risky deals.

Much of the bad advice prompting the new municipal adviser rules pertained to interest-rate swaps — derivative contracts involving the exchange of interest payments that can last 30 years. The complex deals are difficult to comparison-shop, experts say, making it hard for governments to negotiate fair terms and often allowing banks to bake in huge profits.

Former Sen. Christopher Dodd, in a 2010 comment to the Senate, cited news reports that state and local governments "received bad advice from advisers and entered into swaps and other derivatives that they did not fully understand, that are not performing as promised and that are now costing them tremendous amounts to unwind." A 2009 Municipal Securities Rulemaking Board report urging regulation of advisers expressed "great concern" about how well governments understood the possibility of burdensome swap-termination fees.

The Chicago public school system remains entangled in four swap contracts left over from its auction-rate securities deals — contracts that today would cost the district $126.5 million to terminate. Payments on these deals drain funds from the cash-strapped school system every year.

Kalotay, who advised the city of Chicago on a recent bond deal, was skeptical that the new test would improve the advice governments get about interest-rate swaps. He said that even an adviser who had mastered the material outlined by the working group appointed by the rule-making board would be ill-equipped to advise on swap deals.

Advisers who counsel governments on swap deals should have to take a separate specialized test, Kalotay said.

"I think a one-size-fits-all exam won't be sufficient to significantly improve the standards of professionalism in this market," said Fichera, who has served as an expert adviser on auction-rate securities for the SEC.

Peter Shapiro, managing director of Swap Financial Group of South Orange, N.J., called for an "intelligent, bona fide credentialing system for swap advisers."

The fact that municipal advisers do not have to take an additional test before they can advise on swaps "is less than satisfactory," said Shapiro, who has advised the city of Baltimore and other large public borrowers.

Municipal securities regulators defended the proposed exam as part of a larger regulatory framework aimed at improving industry standards.

Lawrence Sandor, the Municipal Securities Rulemaking Board's deputy general counsel, noted in an interview that — unlike before Dodd-Frank — advisers who take on work they are not qualified to do may eventually be subject to sanctions by the SEC.

A proposed board rule expected to come before the SEC for consideration soon would allow municipal advisers to counsel public officials only on matters on which they "possess the degree of knowledge and expertise needed to provide … informed advice."

Sandor also said the board plans to eventually add requirements for continuing education and — potentially — a separate test for supervisors at municipal advisory firms.

He characterized the proposed municipal adviser exam as a test of "basic competency" and advised governments to carefully vet the advisers they hire.

Although municipal advisers who pass the exam would be legally qualified to advise on municipal derivatives such as swaps, a passing score "doesn't necessarily mean that they are expert in any one area," Sandor said.

"We encourage issuers to perform their own assessment of the professional qualifications, expertise, experience and training of those they hire to provide them with advice."

Kidwell, the Tennessee-based adviser who also helped outline the suggested test material, noted that securities industry regulation has developed slowly over time and suggested more specialized tests could be added in the future once a baseline exam is in place.

But Marcus Stanley, policy director of the national advocacy group Americans for Financial Reform, wondered when those specialized tests might be complete.

"It's taken how many years since these problems emerged to get one test in the field?" he asked.